It hasn't quite happened that way, and the economic reasons behind it are interesting. When the cost of information--the cost in time and effort required to find the lowest price on a product--is zero, firms can react in a few ways, says economist Michael Baye of Indiana University. One way, he says, is to vary prices randomly.

Baye teamed up with John Morgan, a professor of economics at the University of California at Berkeley to track the prices of 36 electronics products over a 19-month period using Shopper.com, an online price-comparison service. They found that the seller with the lowest price changed frequently and that the difference between the lowest and highest price could be as much as 60% at any given point in time.

"It's hard to undercut a competitor's price if you don't know what its going to be," Baye says. "And since prices change all the time, consumers are forced to check repeatedly if they're shopping over time."

Vendors may also find an incentive in making their prices hard to find, or in sowing confusion among consumers, says Glen Ellison, a professor of economics at the Massachusetts Institute of Technology. He and his wife Sara Fisher Ellison, also an economist at MIT, found this with online vendors of PC memory. Consumers who clicked on a page offering the lowest-priced memory, sold at a low margin, would be met with a page suggesting that memory of a higher quality sold at a price with a higher profit margin might be better.

"The majority of people--about 60%--take the lower-quality, lower-priced memory, but enough people switch over that the firm makes up the loss," Ellison says. "The profits don't get completely competed away."

Ellison has also found that vendors deal with stiff price competition by offering add-ons to the most competitive products. While an electronics retailer may run a thin margin on a printer, they can make up the margins selling ink cartridges, cables and paper.

Another force in play, Baye says, is consumer loyalty. Once a consumer has had a successful transaction with one vendor, they tend to stick with that vendor, and that creates an incentive on the part of vendors to win them back for repeat business.

Feeling good about doing business with
Amazon.com
, with its reputation for good customers service and dependability, may make consumers feel better about paying 20 cents more on a book than from another online bookseller who may have a lower price. Reputation is also crucial among sellers on
eBay
online auctions.

"Suppose two competitors selling the same thing have an equal reputation rating on a price comparison site. One can't charge a price premium over the other," Baye says.

In another study, Baye and Morgan found that firms with a higher reputation than all the other competitors can charge a premium that tops out at 18%. When two firms in a large field of competitors have an equal reputation, the premium that both can charge relative to others falls to about 5% he says. Once there's a third firm in the game with an equal reputation, the premium they can collectively charge begins to evaporate.

Those who win that loyalty, and who get a good reputation as a result, Baye says, tend to get better traffic from consumers and move more goods. And if a firm gets a better reputation relative to competitors selling equal goods, they can charge more, he says.

"If the cost of information goes to zero, will all firms charge the same low price?" Baye asks. "I think that's true without loyalty, and to that end vendors have invested a lot in building loyalty."